Nige­ria faces cur­rency woes in wake of oil price plunge

The Pak Banker - - MARKETS/SPORTS -

Onele Vin­cent and his col­leagues are fed up with the ris­ing cost of liv­ing. So they de­cided to do some­thing about it and led a noisy protest at a top La­gos ho­tel where they work. "Things are more ex­pen­sive, rent is high, food is high," Vin­cent told AFP last week in the lobby of the South­ern Sun ho­tel, a favourite of the monied elite, politi­cians and ex­pa­tri­ates.

"Ev­ery­thing has in­creased and yet the staff salary has re­mained the same." Vin­cent and the other ho­tel work­ers are far from alone voices in Nige­ria, where many are feel­ing the pain as Africa's big­gest oil pro­ducer strug­gles to adapt to the record lows of global oil prices and its naira cur­rency is un­der de­val­u­a­tion pres­sure.

Daily news­pa­per head­lines warn of "Hard times ahead", while many bill­boards in the com­mer­cial hub of La­gos stand stark white, just blank signs, an in­di­ca­tion that com­pa­nies are trim­ming costs.

Even high fliers are tak­ing a hit. Im­porters of French wine com­plain that de­mand has dried up. Lux­ury car deal­ers and real es­tate agents say busi­ness has dwin­dled.

Africa's lead­ing econ­omy is pro­jected to have grown by 3.0 per­cent in 2015, its slow­est pace in over a decade, ac­cord­ing to an In­ter­na­tional Mon­e­tary Fund re­port in Jan­uary. Un­like Nor­way, which in­vested hun­dreds of bil­lions of dol­lars of its oil money into stocks, bonds and real es­tate, Nige­ria spent its riches when times were good. Now that crude prices have slumped more than two-thirds since $100 per bar­rel in mid-2014, Nige­ria is ex­posed.

Dol­lar re­serves cur­rently stand at a low of $28 bil­lion -- $20 bil­lion less than in April 2013. There is only enough for five months of im­ports for a coun­try heav­ily de­pen­dent on for­eign goods.

While the huge drop in oil prices is a ma­jor headache for Nige­ria, an­a­lysts say it is the govern­ment's re­sponse that is the big­gest cause for con­cern.

The cen­tral bank gov­er­nor, God­win Eme­fiele, on Tues­day dis­missed calls to de­value the naira in his mon­e­tary pol­icy com­mit­tee state­ment. In­stead he chose to con­tinue prop­ping up the cur­rency at 197199 naira to the dol­lar and main­tain for­eignex­change re­stric­tions. As a re­sult, the naira on the black mar­ket is hov­er­ing around a record low of 305, fu­elling com­plaints from do­mes­tic and for­eign busi­nesses who can't ac­cess dol­lars needed for im­ports.

With lit­tle do­mes­tic man­u­fac­tur­ing and years of un­der-in­vest­ment, mis­man­age­ment and cor­rup­tion in the oil sec­tor, Nige­ria de­pends on im­ports for al­most ev­ery­thing, from milk and ma­chin­ery to pe­tro­leum prod­ucts. Jit­tery in­vestors, fear­ing the in­evitable de­val­u­a­tion of the naira, have held off do­ing busi­ness in the coun­try un­til there is a clearer mon­e­tary pol­icy.

"The sit­u­a­tion right now is caus­ing a lot of anx­i­ety and un­cer­tainty be­cause no one knows how to plan for it," said Anna Rosen­burg, emerg­ing mar­kets an­a­lyst at Fron­tier Strat­egy Group. "Ev­ery­one is com­plain­ing about the lack of di­rec­tion from the govern­ment." At­tempts to shore up the naira are de­signed to pro­tect the na­tion's dol­lar re­serves. But the tight forex con­trols have led to ac­cu­sa­tions growth is be­ing stran­gled in Africa's most pop­u­lous coun­try.

"At this stage, a weaker naira is less im­por­tant for fos­ter­ing the re­sump­tion of needed in­ter­na­tional in­vest­ment flows than the lift­ing of the for­eign ex­change re­stric­tion," JF Ruhashyankiko, a Gold­man Sachs econ­o­mist, said in an in­vestor note.

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